A Catering Theory of Earnings Guidance: Empirical Evidence and Stock Market Implications

90 Pages Posted: 16 Oct 2022 Last revised: 14 Mar 2024

See all articles by Nils Lohmeier

Nils Lohmeier

University of Münster - Finance Center Münster

Hannes Mohrschladt

University of Muenster - Finance Center

Date Written: March 23, 2022

Abstract

We propose and test a catering theory of earnings guidance. As predicted by our model, managers cater to reference point dependent investor preferences by issuing excessively optimistic earnings forecasts if their investors have experienced poor stock returns. Moreover, earnings guidance is most biased when managers strongly discount future outcomes, when the stock's payoff uncertainty is high, and when managers face low costs for issuing inaccurate forecasts. Catering via earnings guidance succeeds in moving stock market prices and induces mispricing which is corrected around the corresponding final earnings announcement.

Keywords: Management Guidance, Catering, Capital Gains Overhang, Stock Mispricing

JEL Classification: G14, G30, M41

Suggested Citation

Lohmeier, Nils and Mohrschladt, Hannes, A Catering Theory of Earnings Guidance: Empirical Evidence and Stock Market Implications (March 23, 2022). Available at SSRN: https://ssrn.com/abstract=4240918 or http://dx.doi.org/10.2139/ssrn.4240918

Nils Lohmeier

University of Münster - Finance Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Hannes Mohrschladt (Contact Author)

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/en/the-fcm/lsf/team/hannes-mohrschladt

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